A Look at Diversification

Ancient Chinese merchants are said to have developed a unique way to manage their risk. They would divide their shipments among several different vessels. That way, if one ship were to sink or be attacked by pirates, the rest stood a good chance of getting through and the majority of the shipment could be saved.

Your investment portfolio may benefit from that same logic.

Diversification is an investment principle designed to manage risk. However, diversification does not guarantee against a loss. The key to diversification is to identify investments that may perform differently under various market conditions.

On one level, a diversified portfolio should be diversified between asset classes, such as stocks, bonds, and cash alternatives. On another level, a diversified portfolio also should be diversified within asset classes, such as a diverse basket of stocks.

A Diversified Approach

For example, say a stock portfolio included a computer company, a software developer, and an internet service provider. Although the portfolio has spread its risk among three companies, it may not be considered well diversified since all the firms are connected to the technology industry. A portfolio that includes a computer company, a drug manufacturer, and an oil service firm may be considered more diversified.

Similarly, a bond portfolio that invests exclusively in long-term U.S. Treasuries may have limited diversification. A bond fund that invests in short- and long-term U.S. Treasuries as well as a variety of corporate bonds may offer more diversification.

Mutual Funds and ETFs

The concept of diversification is one reason why mutual funds and Exchange Traded Funds (ETFs) are so popular among investors. Mutual funds accumulate a pool of money that is invested to pursue the objectives stated in the fund’s prospectus. The fund may have a narrow objective, such as the auto sector, or it may have a broader objective, such as large-cap stocks. ETFs also can have a narrow or broader investment objective. Keep in mind, however, the more narrow an investment objective, the more limited the diversification. In addition, a narrow investment objective may result in more volatility and additional risks that are associated with a particular industry or sector.

The concept of diversification is critical to understand when you are evaluating a portfolio. If you want more information on diversification, or have questions about how your money is invested, please call so we can review your situation.

Mutual funds and exchange-traded funds are sold only by prospectus. Please consider the charges, risks, expenses, and investment objectives carefully before investing. A prospectus containing this and other information about the investment company can be obtained from your financial professional. Read it carefully before you invest or send money. Shares, when redeemed, may be worth more or less than their original cost.

The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. This material was developed and produced by FMG Suite to provide information on a topic that may be of interest. FMG Suite is not affiliated with the named broker-dealer, state- or SEC-registered investment advisory firm. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security. Copyright 2019 FMG Suite.

Have A Question About This Topic?

Contact

Check the background of your financial professional on FINRA's BrokerCheck.

The content is developed from sources believed to be providing accurate information.
The information in this material is not intended as tax or legal advice. Please consult legal or tax professionals
for specific information regarding your individual situation. Some of this material was developed and produced by
FMG Suite to provide information on a topic that may be of interest. FMG Suite is not affiliated with the named
representative, broker - dealer, state - or SEC - registered investment advisory firm. The opinions expressed and
material provided are for general information, and should not be considered a solicitation for the purchase or
sale of any security.

Copyright 2019 FMG Suite.

HD Vest affiliated advisors may only conduct business with residents of the states for which they are properly registered. Please note that not all of the investments and services mentioned are available in every state. Securities offered through HD Vest Investment Services? (HDVIS), Member: FINRA / SIPC. Advisory Services offered through HD Vest Advisory Services? (HDVAS), Insurance services offered through HD Vest Insurance Agency LLC. 6333 North State Highway 161, 4th Floor, Irving, Texas 75038, 972-870-6000. The HD Vest affiliated companies exclusively provide financial products and services, and do not provide or supervise tax or accounting services

Content, links, and some material within this website may have been created by a Third Party and was not written or created by a HD Vest affiliated advisor. This content is for educational and informational purposes only and does not represent the views and opinions of HD Vest Financial Services? or its subsidiaries. HD Vest is not responsible for and does not control, adopt, or endorse any content contained on any third party website.

This information is not intended as tax or legal advice. Please consult legal or tax professionals for specific information regarding your individual situation.

Investments & Insurance Products: Are not insured by the FDIC or any federal government agency- Are not deposits of or guaranteed by the bank or any bank affiliate- May lose value